Irrevocable Life Insurance Trusts (ILIT)
Life insurance death benefits may be subject to estate taxes if the policy is owned by the insured. One solution to this problem is to establish an Irrevocable Life Insurance Trust (ILIT) so that the insurance proceeds will not be subject to estate tax at the insured's death.
The concept of the ILIT is relatively simple. Instead of having the insured own the life insurance policy on his own life, thus causing estate tax inclusion, the insured can create a separate trust whose trustee, usually the spouse of the insured, will own and have all incidents of ownership in the life insurance policy. If the trust owns the policy, the proceeds will not be included in the insured's gross estate even though the insured created the trust and established the terms for distribution of the trust's assets upon his death. The current federal estate tax exemption is $3.5 million. However, the State of Illinois imposes an estate tax on estates valued at more than $2 million. The inclusion of life insurance benefits in the insured's estate can substantially increase the tax liability of the estate. For such persons, an ILIT can be an excellent estate planning tool.
An ILIT can get a bit complex when considering the gift tax ramifications involving the payment of premiums. However, there are methods to avoid this problem.
The services of a skilled estate planning attorney can help individuals achieve their goals and minimize the estate tax consequences.
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